What is Contract Modification?
IFRS 15.18 defines a contract modification as a change in scope, price, or both that the parties to the contract approve. Approval can be written, oral, or implied by customary business practices. The first question the entity answers is whether the modification adds distinct goods or services at a price that reflects their stand-alone selling price. If yes, IFRS 15.20 treats the modification as a separate contract and the original contract continues unchanged.
If the answer is no, the entity moves to IFRS 15.21. Two sub-paths exist here. Where the remaining goods or services are distinct from those already transferred, the entity accounts for the modification prospectively (reallocating the remaining transaction price over the remaining performance obligations). Where the remaining goods or services are not distinct (a partially completed single performance obligation, for instance), the entity applies a cumulative catch-up adjustment to revenue recognised to date. ISA 540.13(a) requires the auditor to evaluate whether the entity applied the correct branch of this decision tree before testing the numbers.
Key Points
- A modification that adds distinct goods or services at their stand-alone selling price is treated as a separate new contract.
- Modifications that do not qualify as separate contracts are accounted for prospectively or cumulatively, depending on whether the remaining goods or services are distinct.
- IFRS 15.20–21 decision logic applies to every approved change order, regardless of how small the price adjustment appears.
- Misclassifying the modification method can shift revenue between reporting periods by millions of euros.
Worked example: Dupont Ingénierie S.A.S.
Client: French engineering services company, FY2025, revenue €92M, IFRS reporter. Dupont has a fixed-price contract with a Belgian industrial client for the design and installation of a wastewater treatment system. The original contract price is €4.8M for a single performance obligation satisfied over time, with an estimated total cost of €3.6M. By 30 September 2025, Dupont has incurred €2.16M of costs (60% complete) and recognised €2.88M of revenue.
Step 1 — Identify the modification
On 1 October 2025, the client requests an additional filtration module. Both parties sign a change order adding €1.1M to the contract price, with estimated incremental costs of €0.78M.
Documentation note: file the signed change order dated 1 October 2025 with the original contract. Record the approval date as the modification date per IFRS 15.18.
Step 2 — Assess whether the modification is a separate contract
The filtration module is capable of being distinct (the client could buy it from another supplier) and the entity can identify it separately. However, Dupont agreed to the €1.1M price only because the client awarded the original contract. The stand-alone selling price for the filtration module, based on Dupont's pricing data, would be €1.35M. Because €1.1M does not reflect the stand-alone selling price, the modification does not qualify as a separate contract under IFRS 15.20.
Documentation note: record the stand-alone selling price analysis showing the module's list price of €1.35M against the agreed modification price of €1.1M. Conclude that the separate-contract criterion is not met.
Step 3 — Determine the accounting method
The filtration module is distinct from the design and installation work already completed (the client can benefit from it on its own). Under IFRS 15.21(a), Dupont accounts for the modification prospectively. The revised transaction price for remaining work is: unrecognised portion of the original contract (€4.8M minus €2.88M = €1.92M) plus the modification price (€1.1M) = €3.02M. This amount is allocated over the remaining performance obligations.
Documentation note: record the prospective reallocation calculation. Cross-reference the updated cost-to-complete estimate (original remaining costs €1.44M plus incremental costs €0.78M = €2.22M) and the revised margin analysis.
Step 4 — Revenue recognition post-modification
From 1 October 2025 onward, Dupont recognises revenue on the combined remaining performance using the updated cost-to-complete estimate. The percentage of completion resets for the remaining deliverables only; the €2.88M already recognised is not restated.
Documentation note: confirm that no cumulative catch-up was applied (because the remaining services are distinct) and that the prior-period revenue of €2.88M remains unchanged.
Conclusion: the modification adds €1.1M to the contract but does not qualify as a separate contract because the price is below stand-alone selling price, resulting in prospective treatment under IFRS 15.21(a) that is defensible given the documented pricing analysis.
Why it matters in practice
Teams frequently skip the stand-alone selling price test at the modification date and default to treating every change order as part of the original contract. IFRS 15.20 requires the entity to assess distinctness and pricing on every modification. Without that assessment, the accounting method selection has no documented basis, and the auditor cannot evaluate it under ISA 540.13(a).
On construction and engineering contracts, practitioners often apply cumulative catch-up adjustments when prospective treatment is correct (or vice versa). The distinction under IFRS 15.21 turns on whether remaining goods or services are distinct from those already transferred. Misapplying this step shifts revenue between periods and can trigger restatements when the error is discovered during subsequent-year audits.
Contract modification vs. separate contract
| Dimension | Modification (adjustment to existing contract) | Separate contract |
|---|---|---|
| Trigger | Change in scope or price where the added goods/services are not priced at stand-alone selling price | Change in scope where added goods/services are both distinct and priced at stand-alone selling price |
| Effect on original contract | Original contract is partially or fully revised; revenue may be reallocated | Original contract continues unchanged; new contract accounted for independently |
| Revenue timing | Prospective reallocation or cumulative catch-up, depending on distinctness of remaining deliverables | Revenue on new deliverables recognised separately from the original contract |
| Audit focus | Stand-alone selling price analysis at modification date, correct branch of IFRS 15.21 decision tree | Verification that the price genuinely reflects stand-alone selling price per IFRS 15.20 |
| Documentation requirement | Modification date, pricing analysis, method selection rationale, updated cost-to-complete | Separate contract file with its own performance obligation analysis |
The practical difference surfaces most clearly on long-term construction and IT implementation contracts where change orders are frequent. Treating a non-qualifying modification as a separate contract overstates revenue in early periods because it avoids the reallocation that IFRS 15.21 requires.
Related terms
Frequently asked questions
Does a contract modification need to be in writing to qualify under IFRS 15?
No. IFRS 15.18 states that a modification exists when the parties approve a change in scope or price. Approval can be written, oral, or implied by customary business practices. The auditor still needs evidence of the approval (such as email correspondence or documented pricing acceptance), but a formal signed amendment is not the only valid form.
How do I account for a modification on a contract recognised over time?
Apply the IFRS 15.21 decision tree. If the remaining goods or services are distinct from those already transferred, treat the modification prospectively by reallocating the revised transaction price over remaining performance obligations. If the remaining goods or services form part of a single partially satisfied obligation, apply a cumulative catch-up adjustment to revenue at the modification date.
What happens if a modification is approved but the price is still being negotiated?
IFRS 15.18 requires approval of the change in scope or price. If scope is approved but the price remains unresolved, the entity accounts for the modification using the variable consideration guidance in IFRS 15.50–54, estimating the most likely amount or expected value of the price change and applying the constraint in IFRS 15.56.